Fears over virus fallout drag world stocks down

Asian shares have fallen as worries were growing that a faster-spreading variant of the coronavirus could upend the global economic recovery.

Japan's benchmark Nikkei 225 slipped 0.9 percent to 27,417.75. South Korea's Kospi shed 0.6 percent to 3,226.19. Australia's S&P/ASX 200 declined 0.5 percent to 7,252.20. Hong Kong's Hang Seng lost 1.1 percent to 27,189.43, while the Shanghai Composite fell 0.2 percent to 3,531.54.

Worries about the pandemic continue in Japan, with three days to go before the Tokyo Olympics open. 

Some 11,000 athletes are taking part in the Games, and 22,000 other people have arrived since July 1 to take part in the Games.

Several athletes and more than 60 other non-athletes affiliated with the Games have tested positive. Fears are growing that, despite repeated tests, infections may spread.

The vaccination rollout has been slower in Japan than in other developed nations, with just 22 percent of the population fully vaccinated. Reports that fully vaccinated people have gotten infected are another cause for worry.

On Wall Street, the S&P 500 fell 1.6 percent to 4,258.49, after setting a record just a week earlier. 

In another sign of worry, the yield on the 10-year Treasury touched its lowest level in five months as investors scrambled for safer places to put their money.

The yield on the 10-year Treasury was steady at 1.21 percent after falling to 1.20 percent Monday from 1.29 percent late Friday. In March it was at roughly 1.75 percent.

The Dow Jones Industrial Average slumped 2.1 percent to 33,962.04, while the Nasdaq composite lost 1.1 percent to 14,274.98.

Airlines and other companies that would get hurt the most by potential Covid-19 restrictions took some of the heaviest losses, similar to the early days of the pandemic in February and March 2020. United Airlines lost 5.5 percent, mall owner Simon Property Group gave up 5.9 percent and cruise operator Carnival fell 5.7 percent.

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Contagious delta variant

The World Health Organization says cases and deaths are climbing globally after a period of decline, spurred by the highly contagious delta variant. And given how tightly connected the global economy is, a hit anywhere can quickly affect the other side of the world.

Even in the US, where the vaccination rate is higher than in many other countries, people in Los Angeles County must once again wear masks indoors regardless of whether they are vaccinated following spikes in cases, hospitalisations and deaths.

Any worsening of virus trends threatens the high prices that stocks have achieved on expectations the economy will fulfil those lofty forecasts.

“It’s a bit of an overreaction, but when you have a market that’s at record highs, that’s had the kind of run we’ve had, with virtually no pullback, it becomes extremely vulnerable to any sort of bad news," said Randy Frederick, vice president of trading & derivatives at Charles Schwab. 

“It was just a matter of what that tipping point was, and it seems we finally reached that this morning” with worries about the delta variant, Frederick said.

Positive on swift rebound

He and other analysts are optimistic stocks can rebound quickly. Investors have been trained recently to see every dip in stocks as merely an opportunity to buy low.

Barry Bannister, chief equity strategist at Stifel, was more pessimistic. He says the stock market may be in the early stages for a drop of as much as 10 percent following its big run higher. 

The S&P 500 nearly doubled after hitting its bottom in March 2020.

“The valuations, they just got too frothy," he said. “There was just so much optimism out there.”

Besides the new variants of the coronavirus, other risks to the economy include fading pandemic relief efforts from the US government and a Federal Reserve that looks set to begin paring back its assistance for markets later this year.

Monday's selling pressure was widespread, with nearly 90 percent of the stocks in the S&P 500 lower. Even Big Tech stocks fell, with Apple down 2.7 percent and Microsoft 1.3 percent lower.

This week also brings a slew of earnings reports. Across the S&P 500, analysts are forecasting profit growth of nearly 70 percent for the second quarter from a year earlier. That would be the strongest growth since 2009, when the economy was climbing out of the Great Recession.

In energy trading, benchmark US crude rose 10 cents to $66.52 a barrel in electronic trading on the New York Mercantile Exchange. Brent crude, the international standard, added 40 cents to $69.02 a barrel.

In currency trading, the US dollar rose to 109.52 Japanese yen from 109.46 yen. The euro fell to $1.1779 from $1.1802.

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